Changes in Corporate Debt Ratings and Stock Liquidity: Evidence from the Spanish Market

Abstract

This study examines the existing relationship between announcements of debt rating changes for companies listed on the Spanish stock exchange and the liquidity of their stocks for the period of 2000 to 2010. Liquidity around the announcement day is analyzed using different liquidity measures proposed by the equity market literature. The study also examines the factors that determine the intensity of the announcement’s effect on liquidity. The evidence shows that both positive and negative announcements (of improvement and decline in credit rating) lead to an increase in liquidity, which is anticipated by the market in both cases. Regarding the factors that determine intensity, it is observed that investors combine the information included in the announcement with the characteristics of the issuing company. Still, the recent economic and financial crisis, in which the role of the rating agencies has been greatly questioned, has not changed the intensity of these effects on liquidity.